PSI New Jersey Real Estate State Practice Exam

What is the encumbrance created when a land owner uses his land as security for a loan?

1. Mortgage

2. Deed of Trust

3. Involuntary lien

4. Easement

The correct answer is: Involuntary lien

The correct answer is a mortgage. A mortgage is the legal instrument that a landowner uses to secure a loan by placing a lien against the property. It enables the lender to have a claim against the property if the borrower defaults on repayment. This encumbrance stays with the property and recognizes the lender's interest until the loan is fully repaid. A deed of trust also serves a similar purpose as a mortgage but involves a third party known as a trustee. While both are forms of securing a loan on real estate, the most common term used for the encumbrance in this context is a mortgage. An involuntary lien results from legal actions such as tax liens or judgments against the property owner, not from the owner's voluntary agreement to use their property as loan collateral. An easement grants someone else limited use of the property but does not involve any financial transaction or loan security. Thus, it does not pertain to the situation where a landowner uses land as security for a loan.